Which company is best positioned in the increasingly competitive wireless telecom market? A recent report by HSBC Research, titled All Spectrum Is Not Created Equal, suggests that companies with the highest proportion of lower frequency spectrum (900MHz) are much better placed than those with spectrum in the 1,800MHz frequency space.
It’s already known that the lower frequency spectrum is more efficient, but HSBC’s analysts Rajiv Sharma and Tucker Grinnan emphasize that this is one of the most important differentiating factors in the current environment. For one, they say that operators with access to lower frequencies enjoy about 20% higher Ebitda (earnings before interest, tax, depreciation and amortization) margins than those using 1,800MHz.
In current times, when price competition has intensified, those with lower frequencies have an edge. It’s interesting that new operators, who have been allotted higher frequency spectrum, are the ones that have initiated the price competition.
Another key area of advantage for those with lower frequency is that it gives them better reach in rural areas. The HSBC analysts point out: “Lower frequency spectrum covers greater areas and requires fewer base stations. Operators using higher frequencies such as 1,800MHz need 1.5-2x (one-and-a-half to two times) the number of base stations to cover the same area.”
Since a sizeable chunk of incremental demand is set to come from rural areas, this is also a strategic advantage.
Bharti Airtel Ltd seems to be the major beneficiary of all this, since it has more low-frequency spectrum compared with its peers.
Meanwhile, its enterprise value to Ebitda valuations, based on fiscal year 2009-10 estimates, are at a premium of about 10% to its closet rival Reliance Communications Ltd.
In the near term, the latter’s earnings are expected to be under pressure because of its recent entry into the GSM (global system for mobile communications) technology platform and because of its relatively high leverage.
Assuming nothing new comes up in terms of regulatory risk, the difference in valuation should widen, in line with the expected divergence in financial performance of the two telecom companies.
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